Lotte, Hershey Launch China Candy Venture

U.S. candy and snacks group Hershey and South Korea's Lotte Confectionery will set up an $80 million joint venture to make chocolate in China, aiming to boost share in a market dominated by Mars.

The deal potentially opens the door on a huge market for the maker of Hershey's Kisses and Reese's peanut butter cups as it faces higher costs and fiercer competition in the U.S..

China's chocolate market, which Lotte estimates at about $600 million and sees doubling annually in tandem with economic growth, is 50% controlled by Mars.

Hershey , which has no manufacturing base outside the U.S., also aims to sell chocolates produced at Lotte's Shanghai factory to the rest of Asia, including Japan, the two companies told a joint news conference in Seoul on Monday.

Lotte will be able to use Hershey's distribution networks to market its chewing gum line-up in the U.S.. "By 2010, we want to have the No. 2 market share in China, or about 23%," Hershey Senior Vice President John P. Bilbrey said, adding its market share now hovers around 10-12% in some parts of the country. "It's never too late doing business in China, and I believe the time is now."

The joint venture, 51% owned by Lotte and the rest by Hershey, would help the U.S. firm cut costs as it can use Lotte's manufacturing facility in Shanghai, which the South Korean firm bought last year. "This is a win-win alliance for both companies: $80 million won't be a financial burden on them, while they get great opportunities in China and the United States," said Chung Hong Taek, an analyst at Samsung Securities.

Hershey and Lotte will make their own products from the factory, which is expected to begin operations in April, with products available in retail locations in China by August.

The agreement, which a source had disclosed to Reuters last week, is part of a strategic alliance that allows the two companies to explore opportunities for marketing and distribution in Asia and the U.S..